I recently came across an interesting article at all Business that outlined ways to improve your sales compensation plans in ways that will increase the company’s profits.
A good compensation plan is substantial when it comes to sales; a poorly crafted plan can have various effects on a company – from disgruntled employees to bankruptcy.
Many managers fail to see or acknowledge that their sales incentive compensation plan is poor of flawed and hang the blame on everything and everyone else, be it a lack of motivation or skill among the sales personnel, inadequate information systems, the poor economy, etc.
There are six key features that must be taken into consideration when formulating a compensation plan. While many of them will seem obvious to you, still many compensation plans exist that don’t include these following features:
• Pay more for what you want to sell more – Usually companies have more than one product, and not all products are alike. In order to stress the importance of one particular product over the others a higher compensation is needed, otherwise the sales personnel have no incentive to favor selling that product over the others, and as a result the company will suffer.
• Higher profit margin = Higher compensation – Again, seems obvious but the trick here is for the company to find out which product adds the most to the bottom-line profit and compensate accordingly. Some companies don’t take the necessary steps in finding out important details like these about their products and the way they affect the profit margin and end up compensating more (or at least the same) for products that earn it less.
• No earnings limits – When you set a salesperson an earnings limit it’s like you’re telling him: “I only want you to work that hard”. The idea is that even after the compensation is deducted, the company is still left with a net profit for each product sold. In other words, the more product sold – the higher the profit will be. As a company the goal should be to sell an infinite amount of profitable products and an earnings limit goes against that logic.
• Reward ASAP – It may sound bad to say it like that but it’s like training a dog. If you tell a dog to sit but give him the treat 2 hours later, he will not connect the treat to the command and may not seat next time you tell him to. The idea is to strengthen the link in the salesperson’s mind between the sales and the rewards. The best method is to pay the compensations at the beginning of each month (for the work done in the previous month of course).
• Top it all off with a bonus – In addition to the commissions it’s best to also give out rewards that acknowledge that person’s hard work (like “sales person of the month”), this shouldn’t be done on a daily or weekly basis in order for it to remain effective and must be “saved” for special occasions/performances.
• Be clear – Probably the most important one of all. You can formulate the best compensation plan the world has ever seen but if it’s too complicated for anyone to understand, particularly the sales personnel, it will be poorly executed. A clear and understandable plan will help everyone get on board with ease.
In conclusion, follow these features when formulating a new compensation budgeting and you’ll immensely improve your chances to succeed. However, it’s also important to put the plan in the hand of the right person – a good plan at the hands of a poor sales manager will go to waste. It’s like building the world’s most advanced bus but putting someone without a driving license at the wheel.